| Abstract: |
Do the parties in a typical dispute face incentives similar to those in the
classic prisoner's dilemma game? In this paper, we explore whether the costs
and benefits of legal representation are such that each party seeks legal
representation in the hope of exploiting the other party, while knowing full
well that failing to do so will open up the possibility of being exploited.
The paper first shows how it is possible to test for the presence of such an
incentive structure in a typical dispute resolution system. It then reports
estimates of the incentives for the parties to obtain legal representation in
wage disputes that were settled by final-offer arbitration in New Jersey. The
paper also reports briefly on similar studies of data from discharge
grievances, court-annexed disputes in Pittsburgh, and child custody disputes
in California. In each case, the data provide evidence that the parties face
strong individual incentives to obtain legal representation which makes the
parties jointly worse off. Using our New Jersey data, we find that expert
agents may well have played a productive role in moderating the biases of
their clients, but only early on in the history of the system. Over time, the
parties slowly evolved to a non-cooperative equilibrium where the use of
lawyers becomes nearly universal, despite the fact that agreeing not to hire
lawyers is cheaper and does not appear to alter arbitration outcomes. |